The unlikely history behind one of Wall Street's iconic funds

Ray Dalio explains the origins of his All Weather strategy.Bridgewater

A fund run by the world's biggest hedge fund firm wasn't supposed to be for outside investors.

Bridgewater's All Weather strategy started out as a way to manage billionaire founder Ray Dalio's personal trust, according to a video just published by the firm as part of a website revamp.

The fund was the first of the "risk parity" movement, a strategy since adopted by firms like AQR Capital and Neuberger Berman. Risk parity attempts to equalize the risks that investors take across asset classes and provide steady returns.

"Never was there going to be a product called All Weather," Bob Prince, the firm's co-CIO, named simply "Bob" in the video, said.

Dalio proposed the idea for All Weather, which is supposed to perform well in all market environments, in 1988 or 1989, Prince added in the video.

"Ray asked the question, 'Gee, I wonder what kind of investment portfolio you would hold that would perform well across all environments,'" Prince said.

Dalio imagined four portfolios with an equal amount of risk in them that would do well in different environments. He looked at hundreds of years of history to see how that balanced portfolio would perform over time, and then ran a pilot, putting his own trust money in the fund to begin with.

The All Weather portfolio was launched in 1996.

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"If I could pick one gift, All Weather would be that gift," Dalio said in the video. "It means that without giving up returns, you can have a portfolio that really is safe."

Dalio's trust assets remain in All Weather, and now it manages money for institutional investors like public pensions and endowments. Firmwide, Bridgewater Associates managed $152 billion as of last year, according to a regulatory filing.

The All Weather strategy invests using exchange-traded futures contracts, OTC derivatives, cash securities, and spot and forward contracts in the international currency market, according to the filing.

"It is predicated on the notion that asset classes react in understandable ways based on the relationship of their cash flows to the economic environment. By balancing assets based on these structural characteristics the impact of economic surprises can be minimized."